How Currency Works

Forms of Currency: Coins

The first coins were minted in Lydia, an ancient empire in the area of modern Turkey. The Lydian king Croesus started making small metal ingots stamped with an imperial emblem around 640 B.C.

This Lydian custom spread to the Greeks and eventually to the Romans. Coins were usually made of silver or gold, and their value was enforced by the authority of the government that issued them. If the Athenian officials declared that all coins minted in Athens, with the official stamp of Athens, were 97 percent silver, then those coins would be traded at that value.

In China, coins developed at about the same time that they did in the West. In the fifth century, B.C., the Chinese began using a form of commodity currency in the shape of knives or other tools. The metal blades had a round hole at one end, so the money could be strung onto a rod or rope. Eventually, the tools became more stylized. Over the years, they became smaller and smaller, until only the round end with a hole in it was left. These round, pierced Chinese coins remained virtually unchanged until the 1800s.

An important effect of coins was that governments now controlled the release of money into the market. They could also manipulate the money supply. This was done by various Roman emperors, who would reduce the precious metal content of Roman coins when they needed money. They figured that if a ton of gold made 10,000 gold coins, they could have twice as many coins by cutting the gold content in half. Instead of making the emperors richer, the constant devaluation of Roman coins -- and the resulting instability of the Roman economy -- is one of the factors that led to the fall of the Roman Empire.

When Rome fell, most of Europe returned to a more primitive, feudal system of economy. Throughout the Dark Ages, people became distrustful of coins, and that currency fell out of use. Coinage wouldn't return until the Renaissance.